As technology and improved just-in-time inventory reshape manufacturing, the right accounting practices can smooth the transition.
October 19, 2018
By Frank A. Peña, CPA
Good and timely information is the lifeblood of the best manufacturing practices and procedures, and can be the difference between breaking even and making a profit. In today’s manufacturing world, ever more of that information comes through technology, with the smart factory, or industry 4.0, now a case of move forward or fall behind – with possibly fatal consequences to businesses that don’t keep up.
Artificial intelligence is remaking the factory floor, with, for example, robots telling other robots when materials run low – ink perhaps – and placing orders automatically. This, and other, streamlining can shorten the time between when an order is placed, a product delivered, and payment received, enhancing and fulfilling the promise of just-in-time inventory practices.
Such disruption couldn’t come at a better moment for the manufacturing and distribution sectors, which are benefiting from a thriving economy. U.S.-based manufacturing grew 9 percent between the first quarter of 2012 and the first quarter of 2018, according to an analysis by the Institute for Supply Management. The organization expects manufacturing employment to grow by 1.8 percent during 2018.
Just-in-time inventory practices can indeed help maximize cash flow, and manufacturing companies must use technology to identify and gather accounting data to speed up the cycle. Ultimately, good accounting can become the catalyst for action.
Understand and optimize processes
The first step is to understand your entire operational workflow: ordering, assembly, inventory and collections. Pinpointing where workflow can be improved requires implementing and monitoring the proper metrics for each process. Those might include the number of days for credit terms in customer contracts or the percent of on-time or early versus late customer collections.
Next, identify ways to optimize each process. Updating manual processes is one key area to consider, but this isn’t always about automation. It also includes such strategies as establishing favorable credit terms with suppliers. Also, check that you aren’t missing the basics, such as timely reconciling bank statements and pursuing old receivables. Often, owners and managers are so focused on the core business that these end up on the back burner.
In each process, technology can help you keep a handle on various aspects of the business, even as the business grows and becomes more complex.
Improve internal controls
Timely, automated accounting also can help improve internal controls.
Manufacturing and distribution companies need robust internal controls. That has been recognized for centuries: The pharaoh’s scribes in ancient Egypt prepared records of receipts and disbursements of silver, corn and other commodities. One scribe recorded on papyrus the amount brought to the warehouse and another checked the emptying of the containers on the roof as it was poured into the storage building. A third scribe performed an audit, comparing the two records.
Those ancient scribes knew what we know: Fraud is always a risk, and internal control weakness is behind nearly half of fraud cases, according to the Association of Certified Fraud Examiners’ . The ACFE report also found that 22 percent of cases include $1 million or more in losses. The impact can be especially devastating to small businesses.
Three elements underlie fraud: pressure, rationalization and opportunity. It’s not uncommon for us to encounter manufacturing companies that were victimized by a trusted employee who was not well supervised (as a result of that trust) and was able to perform complete financial transactions, from approving orders and cutting checks to approving payments.
Automated accounting practices may help you spot off-pattern transactions or approvals, and allow more people to be involved in a transaction without sacrificing speed. But the first steps in preventing fraud can’t be automated: consider engaging a professional who can come to your facilities and interview employees, observe procedures and assess your internal controls, including where gaps might be. Then, determine optimal solutions to mitigate the risks of fraud through introduction of new procedures or reallocation of tasks to segregate certain duties.
Approvals and authorizations should delineate clear lines of responsibility, and segregating financial duties is critical to preventing fraud. Technology should come into play throughout the manufacturing process, potentially improving everything from cash flow and inventory management to internal controls. But, once you’ve purchased the technology, don’t forget training and proper implementation. We see too many companies that buy new technology, but don’t learn more than the basics. We’ve found businesses that are still using an Excel spreadsheet to track inventory, despite investing in modern software.
As we often remind our clients, first, look to what you already have and how you can improve it to meet your business goals.
Frank A. Peña, CPA is a principal in Kaufman Rossin’s assurance and advisory services practice and a co-leader of the firm’s manufacturing practice.